Payment for ecosystem services

Indian Economy glossary

Also called: PES · Topic: Environment and Sustainable Development · NCERT: Beyond NCERT

Meaning

Payment for ecosystem services (PES) is a scheme where the people who benefit from nature pay the landowners or communities who look after it. The payment is made so that the land keeps giving services such as watershed protection or carbon storage. This matters because markets usually put no price on these services. PES turns an externality into an income, so protecting nature can pay as well as destroying it. An externality is an effect on other people that the market does not price.

Explanation

How PES works

  • The basic problem: a forest's services, such as clean water downstream or stored carbon, carry no market price.
  • The owner earns nothing from these services, so they are treated as free.

  • The owner earns only when trees are cut and the timber is sold. So clearing the land looks like the best choice.

  • The PES fix: the people who benefit pay the people who provide the service.

  • Beneficiaries: downstream cities, water users, or the whole world (for carbon storage).
  • Providers: upstream farmers, forest dwellers and landowners.

  • The payment covers the income the provider gives up by not clearing or misusing the land.

  • Beneficiary pays: PES rewards good behaviour. A pollution tax works the other way: it charges the polluter for bad behaviour.

Which services PES pays for

  • The Millennium Ecosystem Assessment (MEA, 2005) sorts ecosystem services into four groups: provisioning, regulating, cultural and supporting.
  • PES usually targets regulating services, meaning nature's own control of processes such as flood control, climate and pollination.
  • Watershed protection means forests on hills hold soil and control the flow of water to towns below.

  • Carbon storage means trees and soil keep carbon out of the air.

  • Under Total Economic Value (TEV), these count as indirect use values. They are the value of the services a forest provides, not the value of the timber.

  • Natural capital (the stock of forests, soil and water) gives a yearly flow of services. PES pays people to use only this flow and to leave the stock intact.

Worked example: why PES changes the choice

Take the forest from the study note:

  • Timber (direct use) = ₹40 crore a year. Flood control (indirect use) = ₹25 crore. Option value = ₹5 crore. Existence value = ₹20 crore. Bequest value = ₹10 crore.
  • TEV = ₹100 crore a year. An owner who counts only timber sees ₹40 crore and undervalues the forest by 60%.
  • The ₹25 crore of flood control goes to people downstream. The owner gets none of it.
  • With PES:
  • Downstream users pay the owner for flood control.
  • Keeping the forest now earns the owner real money.
  • The owner's choice moves closer to what is best for society.

What makes PES work well or badly

  • Good valuation: the payment needs a money value for the service. That value comes from methods such as contingent valuation (CVM), a survey of how much people are willing to pay (WTP). Stated answers can be hypothetical, so the payment can be set too high or too low.
  • Conditionality: payment should depend on the service actually continuing, for example the forest staying standing.
  • Clear land rights: you can only pay someone who has a recognised right over the land.

In India

  • The fiscal analogue: the 15th Finance Commission
  • It gives 10% weight to "forest and ecology" in the formula that shares central taxes among states (tax devolution).
  • States with more dense forest get more money.
  • This pays states to protect forests instead of clearing them.

  • The payment goes to state governments, not directly to landowners. That is why it is called an analogue of PES.

  • NPV (Net Present Value) of forests: the same valuation logic sets the amount charged when forest land is diverted to non-forest use.

  • Measuring the services: MoSPI / NSO (the National Statistical Office, under the Ministry of Statistics and Programme Implementation) compiles SEEA-based environment accounts. EnviStats India 2024: Environment Accounts was the 7th consecutive issue, released on 30 September 2024 [1]. It includes accounts of ecosystem extent, condition and services [2]. Accounts like these give a base for setting PES payments.
  • Partha Dasgupta Committee (2013): set up by MoSPI. It proposed a framework for green national accounts for India.

Don't confuse with

  • Pigouvian (pollution) tax: it makes the polluter pay for harm done. PES makes the beneficiary pay for a benefit provided. One punishes, the other rewards.
  • NPV of forests: a charge collected from those who divert forest land. PES is a payment made to those who protect it.
  • Green accounting (green GDP): a way of measuring by subtracting depletion and degradation from national income. It moves no money. PES is a payment that changes behaviour on the ground.
  • Supporting services: soil formation and nutrient cycling reach people only indirectly. PES usually pays for regulating services such as flood control and watershed protection. Pollination is also regulating, not supporting.

Prelims Hooks

  • PES pays landowners or communities to keep providing services such as watershed protection and carbon storage. It turns an externality into an income.
  • Costa Rica's PSA scheme (1997), Pagos por Servicios Ambientales, pays landowners to conserve forest. It is the classic PES example.
  • 15th Finance Commission: a 10% weight for "forest and ecology" in tax devolution. This is India's fiscal PES analogue.
  • MEA (2005): watershed protection, flood control and pollination are regulating services, not supporting.
  • In TEV, watershed protection and carbon storage are indirect use values. Option value is also a use value.
  • Dasgupta Review (2021), The Economics of Biodiversity, was written for the UK Treasury. It treats nature as an asset, which is the idea that PES puts into practice.

Mains Points

  • Fiscal incentives for conservation: Costa Rica's PSA (1997) and the 15th Finance Commission's 10% forest-and-ecology weight both reward the people who provide ecosystem services. Is 10% enough to make up for the development given up by forest-rich states in the North-East and central India? Payments made to state governments may also never reach the forest dwellers who actually protect the forest.
  • Limits of putting a price on nature: PES depends on valuation methods such as TEV and CVM. These money values can be unreliable, and some values, such as sacred groves or tribal cultural value, may not fit any price. A payment set too low will not stop clearing. A payment that sets no conditions pays for forest that would have survived anyway.
  • Linking PES to green accounts: India's annual SEEA-based EnviStats accounts [1][2] measure ecosystem services. The next step is to value depletion in the main national accounts, as the Dasgupta Committee (2013) proposed. Better measurement would make PES payments easier to set and to defend.

Related concepts

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Sources

  1. 1Press Note on EnviStats India 2024: Environment Accounts (PIB)pib.gov.in · tier 1
  2. 2EnviStats India 2024: Environment Accounts (MoSPI)mospi.gov.in · tier 1